NSW Court of Appeal puts a broad application of proportionate liability defences back on the agenda

Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2) [2024] NSWCA 232

The New South Wales Court of Appeal's recent decision in Gerrard Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (No 2) [2024] NSWCA 232 opens potential to extend the ambit of s 34(1)(a) of the Civil Liability Act 2002 (NSW) (CLA) beyond the strict formulation in Rahme that a failure to take reasonable care must be an element of the successful cause of action.

Background

This appeal was brought by City Garden's former solicitors, Gerrard Toltz Pty Ltd (Toltz), in respect of an award of damages against Toltz for breach of fiduciary duty by reason of a conflict between Toltz's duty to City Garden (as a client of Toltz) and Toltz's interest/duty to another client in relation to a development project in North Rocks (North Rocks Project).

Toltz had an ongoing general retainer with City Garden, which included providing legal advice and arranging finance for the North Rocks Project. Toltz acted for City Garden in the initial financing of the North Rocks Project, including the acquisition of the property and the development rights. Toltz also acted for Gemi Investments Pty Ltd (Gemi Investments), a lender to City Garden on a later loan to City Garden for the North Rocks Project, which led to the claim by City Carden against Toltz on the basis of a conflict of interest.

The Court allowed the appeal by holding that the ongoing general retainer between Toltz and City Garden was one only to act regarding financing transactions where instructed by City Garden to do so and that there was thus no onus on Toltz to "limit" its retainer. Therefore, there was no basis to find that Toltz owed a fiduciary duty to City Garden to act in its best interests in relation to its entry into the first loan and there was also no basis to find that Toltz had a material conflict of duties in acting for Gemi Investments on the first loan.

Did the primary judge err in finding that the claim against Toltz was not an apportionable claim?

A notable issue considered on appeal was appeal ground 11, being: (vi) Did the primary judge err in finding that the claim against Toltz was not an apportionable claim under s 34 of the Civil Liability Act and in not reducing Toltz’s liability on that account? (Apportionment Ground)

At first instance, Toltz's contention that the claim was apportionable for the purposes of Part 4 of the CLA, was rejected by the primary judge on the basis that "a failure to take reasonable care was not an element of the cause of action against Toltz".

On appeal, the Apportionment Ground centred on Toltz's contentions that:

1. the liability as found by the primary judge, albeit not as pleaded by City Garden, was predicated upon a finding that Toltz breached the fiduciary duty;
2. in light of that reasoning, there is an available characterisation of her Honour's findings as amounting to a failure by Toltz to take reasonable care; and
3. accordingly, the claim for economic loss falls within the ambit of s 34(1)(a) of the CLA.

On the Apportionment Ground, the Court (per Basten AJA, Kirk JA not deciding) held that it was unnecessary to reach any concluded view but commented that there is doubt as to the correctness of the statement of this Court in Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211 at [135] (Rahme), relied upon by the primary judge which focused on the narrow question whether a lack of reasonable care is an element of the cause of action.

In Rahme, Macfarlan JA found as a matter of principle, that a defence of proportionate liability was not available where a failure to take reasonable care was not an element of the cause of action on which the plaintiff succeeds. In reaching this conclusion, Macfarlan JA relied upon his comments in Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58 (Perpetual v CTC).¹

In examining the line of authority in Rahme, Basten AJA opined that the approach of Barrett JA in Perpetual v CTC appears to more closely accord with the statutory language and purpose of s 34(1)(a) of the CLA. In that case, Barrett JA said at [42]:

"It cannot be suggested (nor do I think it has been suggested in any decided case) that the nature or quality of a ’claim‘ is, for relevant purposes, to be determined solely by looking at the court’s decision in relation to it. Nor is the nature or quality of a ’claim‘ to be determined solely by looking at the terms in which it is framed. Rather, it is a combination of the terms in which the claim is framed (or pleaded) and relevant findings of the court in relation to it that must be assessed in order to decide whether it is a claim 'in an action for damages… arising from a failure to take reasonable care' and has the other attributes of an 'apportionable claim' under s 34(1)(a)."

[emphasis added].

Basten AJA identified further considerable support at the appellate level for an approach to determining whether a claim falls within s 34(1)(a) which looks to both how a claim is framed, and the findings of the court, but is not limited in its focus to the narrow question from Rahme, of whether a lack of reasonable care is an element of the cause of action.

His Honour pointed out, in Rahme itself, the claim did not rely in any way upon a lack of reasonable care and in these circumstances, there is room to doubt the narrow approach adopted by Macfarlan JA in Rahme as authority.

Key takeaways

In light of the above, there remains room to challenge the narrow approach in Rahme and potential to widen the ambit of s 34 of the Civil Liability Act 2002 (NSW) (Proportionate Liability) to extend to claims which do not strictly involve a failure to take reasonable care as an element of the cause of action.

This is a welcome case law development given the other recent decision of the New South Wales Court of Appeal in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301 which severely curtailed the application of proportionate liability to the statutory duty of care imposed under s 37 of the Design and Building Practitioners Act 2020 (NSW).

¹ Note: In this case, Macfarlan JA found that the apportionment provisions in the CLA did not apply but went on to consider whether the claim was an apportionable claim on the assumption that the plaintiff was entitled to succeed on at least one cause of action that did not require it to prove that the defendant had failed to exercise reasonable care.